Hamilton v. Comm'r of Internal Revenue (In re Estate of Lumpkin)

Decision Date19 July 1971
Docket NumberDocket No. 1715-68.
Citation56 T.C. 815
PartiesESTATE OF JAMES H. LUMPKIN, JR., DECEASED, CHRISTINE T. HAMILTON, EXECUTRIX, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Rudy M. Groom, for the petitioner.

Daniel A. Taylor, Jr., for the respondent.

Decedent's life was insured under a group term life insurance policy paid for entirely by his employer, and the beneficiaries of the policy were designated by the employer. Decedent's only substantive right under the policy was to select an optional mode of settlement which would spread payments to one of the beneficiaries, his spouse, over a longer period of time. Held, decedent did not possess any of the incidents of ownership of the policy within the meaning of sec. 2042, I.R.C. 1954.

FEATHERSTON, Judge:

Respondent determined a deficiency in petitioner's Federal estate tax in the amount of $8,070.42. The sole issue presented for decision is whether at the time of his death, decedent possessed any of the incidents of ownership in a group term life insurance policy within the meaning of section 2042. /1/

FINDINGS OF FACT

Christine T. Hamilton (hereinafter referred to as petitioner) is the surviving spouse and independent executrix of the Estate of James H. Lumpkin, Jr. (hereinafter decedent), who died on March 15, 1964. She was a resident of Houston, Tex., at the time she filed her petition. She filed the Federal estate tax return with the district director of internal revenue, Austin, Tex.

Decedent was an employee of Humble Oil & Refining Co. (hereinafter Humble) at the time of his death, and was covered by Group Term Life Insurance Policy No. 13550 issued to Humble by the Equitable Life Assurance Society of the United States (hereinafter Society). Humble paid all the premiums on the policy.

During 1960, Standard Oil Co. of New Jersey (hereinafter Standard), in behalf of Humble, submitted to several insurance companies specifications for insurance to be provided for Humble's employees and requested bids thereon. On December 23, 1960, Standard selected one of the companies, the Society, as the administrator of the insurance plan. The specifications of the benefits to be provided, together with the terms of a similar insurance policy which was in effect prior to January 1, 1961, formed the basis for policy No. 13550 which was delivered on May 11, 1964, but took effect on January 1, 1961.

Prior to May 11, 1964, there was no single document which stated precisely the terms of the policy. During the period between January 1, 1961, when the insurance coverage became effective, and May 11, 1964, when the policy was delivered to Humble, the wording of the policy was drafted, and approval of its terms was obtained from the insurance commissions of the States of Delaware and New York. The substantive provisions of the policy, however, were not changed during this period.

In January 1962, Humble issued a booklet to its employees describing the benefits provided under the policy as follows:

NONCONTRIBUTORY GROUP LIFE INSURANCE

This insurance coverage is available to employees at no cost to themselves and is designed to provide payments to dependent relatives for a period of time. The proceeds of this insurance will be paid to the employee's survivors in the first class of preference relatives described below in which there is a survivor:

+----------------------------------------------+
                ¦Classes of Preference Relatives ¦ ¦           ¦
                +--------------------------------+-+-----------¦
                ¦1.¦Spouse                       ¦)¦           ¦
                +--+-----------------------------+-+-----------¦
                ¦2.¦Minor or permanently disabled¦)¦           ¦
                +--+-----------------------------+-+-----------¦
                ¦  ¦                             ¦)¦who qualify¦
                +--+-----------------------------+-+-----------¦
                ¦  ¦children                     ¦)¦           ¦
                +--+-----------------------------+-+-----------¦
                ¦3.¦Parents                      ¦)¦           ¦
                +----------------------------------------------+
                

To qualify, these relatives must have been either (1) living with the employee at the time of his death or (2) dependent1A upon him. They must be able to furnish satisfactory proof of their relationship and dependency.

Payments to preference relatives consist of:

1. A lump sum of $500 payable at time of death, plus

2. A series of monthly payments, each amounting to 1/2 of the employee's monthly normal compensation at the time of death. These installments continue for a period of time, depending upon the employee's Benefit Plan service as shown on this table. If more than one beneficiary survives in the same class, the installments are divided equally among them.

+--------------------------------------------------------+
                ¦No. of years of service  ¦¦No. of monthly installments  ¦
                +-------------------------++-----------------------------¦
                ¦1                        ¦¦6                            ¦
                +-------------------------++-----------------------------¦
                ¦2                        ¦¦10                           ¦
                +-------------------------++-----------------------------¦
                ¦3                        ¦¦14                           ¦
                +-------------------------++-----------------------------¦
                ¦4                        ¦¦18                           ¦
                +-------------------------++-----------------------------¦
                ¦5                        ¦¦24                           ¦
                +-------------------------++-----------------------------¦
                ¦10                       ¦¦29                           ¦
                +-------------------------++-----------------------------¦
                ¦20                       ¦¦39                           ¦
                +-------------------------++-----------------------------¦
                ¦30                       ¦¦49                           ¦
                +--------------------------------------------------------+
                

Increasing by one payment for each year of service.

If a preference relative dies before the series of installments is complete, then any remaining payments will be made to other preference relatives in the same class; or if there is none, in the next lower class in which there is a preference relative. If there are no remaining preference relatives then payments stop.

The payments were to be made to the beneficiaries as follows:

The $500 lump sum benefit is payable at death, with installments payable monthly * * * ; however, you may elect to spread payments out over a still longer period by reducing the amount payable each month. If you have not made such an election, a beneficiary may do so upon your death. Lump sum payment of the full amount is not possible.

The booklet also states that, under the noncontributory group life insurance plan, ‘Protection ceases on termination of employment.’ In describing another life insurance plan for which the employee paid part of the premiums, the booklet states that it provided for a ‘conversion privilege’; no similar statement was made in describing the policy here involved.

The policy as issued recites that ‘This policy is delivered on the eleventh day of May 1964, in the State of Delaware and is governed by the laws thereof.’ The policy provides for ‘Fixed Group Life Insurance Coverage’ and ‘Contingent Survivors Group Life Insurance Coverage.’ The ‘Fixed Group Life Insurance Coverage’ provides for an amount of $300 to be paid immediately on the employee's death either to his preference relatives, dependent other relatives, or the person who paid the expenses of his last illness or burial.

The policy contains the following additional provisions:

J. ‘Preference relative’ means a person who, at the time of the death of the covered individual, is a member of one of the following classes of relatives of the covered individual:

1. Qualifying spouse.

2. Qualifying children who are under 21 years of age or permanently incapable of self-support.

3. Qualifying parents.

‘Qualifying’ means, in this definition, living with the covered individual or receiving support from him to the extent of at least 20% of the amount the covered individual was last receiving (when receiving something) as an employee of annuitant.

‘Spouse’ means person lawfully married to the covered individual.

‘Child’ means legitimate (including posthumous) son or daughter, stepson or stepdaughter, or legally adopted son or daughter. But there is this exception: if a child of the covered individual is legally adopted by another person of the same sex as the covered individual, then he is not a child of the covered individual.

‘Parent’ means the person whose legitimate child, stepchild, or legally adopted child the covered individual is.

K. ‘Dependent other relative’ means a relative by blood or marriage (other than a preference relative) toward whose support the covered individual has expended at least $300 during the year preceding his death, and was still expending something at the time of his death.

Part 2— Contingent Survivors Group Life Insurance Coverage

If due proof in writing is received by the Society that the death of an individual occurred while he was insured under this policy and that he is survived by a beneficiary, the following survivor payments will be made:

A. If the individual is a covered employee, the survivor payments shall consist of:

1. a lump sum payment of $200, and

2. a series of monthly installments, the amount and number of which shall be determined as follows:

(a) Amount:

If any preference relative survives the employee, the amount of each monthly installment shall be 1/2 of the employee's monthly normal compensation as of the governing date.

If no preference relative survives the employee, but one or more dependent other relatives survive him, the amount of each monthly installment shall be the lesser of the following amounts:

(i) 1/2 of the employee's monthly normal compensation as of the governing date, and

(ii) The average monthly rate of the employee's expenditures as of the governing date for the support of the dependent other relatives who are still living when...

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